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Profitability Ratios

Profitability ratios measure a company's ability to generate earnings from its operations and investments. Some key profitability ratios include: 1. Gross margin ratio, which measures the margin on sales the company is achieving. 2. Profit margin (return on sales), which measures the overall profitability of the company. 3. Return on equity, which is monitored by analysts and investors as it shows how successful management is at creating value for shareholders. It can be calculated using the DuPont analysis method.

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320 views2 pages

Profitability Ratios

Profitability ratios measure a company's ability to generate earnings from its operations and investments. Some key profitability ratios include: 1. Gross margin ratio, which measures the margin on sales the company is achieving. 2. Profit margin (return on sales), which measures the overall profitability of the company. 3. Return on equity, which is monitored by analysts and investors as it shows how successful management is at creating value for shareholders. It can be calculated using the DuPont analysis method.

Uploaded by

Meghan Kaye Liwen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

PROFITABILITY RATIOS- It measures the earning ability of a company and the extent to

which invested funds are being used efficiently.

1. Gross Margin Ratio- it measures the margin on sales the company is achieving. It may be
indicated to what extent the selling prices of goods per unit may be reduced without
incurring losses on operations.
Gross Profit
Gross margin=
Net Sales

2. Profit Margin (Return on Sales)-It measures the overall profitability of the company.

Net Income
Return on Sales=
Net Sales

3. Total Assets Turnover- It measures the company’s ability to use assets to generate sales.
Net Sales
Total Assets Turnover=
Average Total Assets
4. Return on Assets- It is a measure of how profitably assets have been deployed.
Net income+ ( Interest Expense∗( 1−tax rate ))
ROA=
Average total assets

ROA ( Du Pont Equation )=Profit margin∗Total Assets turnover

5. Return on Equity (Du Pont Analysis)- It is a financial ratio which is monitored by


financial analysts, business managers and investors because it is an important metric
showing how successful is the management of the company in creating value for the
business and its stakeholders.
( Net Income )
ROE=
Average Total Equity

ROE=Profit margin∗Total Assets Turnover∗Equity Multiplier


Equity Multiplier= the relationship of the stockholder’s equity to the assets of the company.
Firms that use a large amount of debt financing will necessarily have a high equity multiplier
Average Total Assets
EM =
Ave .Total SHE

6. Earnings Per Share- it gives a view of the comparative earnings or the earnings power of
the firm.
Net Income−Preferred Dividends
EPS=
Ave . No . of Ordinary Shares Outstanding
7. Price Earnings Ratio- This tells us how much investor is willing to pay for a peso of
current earnings. In general, investors regard companies with higher price-earnings ratios
as being less risky and/or more likely to enjoy higher growth in the future.
Market price per share
PER=
EPS

8. Dividend Payout Ratio- gauges the portion of current earnings being paid out in
dividends.
Dividend per share
DPR=
EPS

9. Dividend Yield Ratio- It is primarily of interest to retirees and other stockholders who
need a steady stream of cash income from their investments.
Dividend per share
Dividend Yield Ratio=
Market Price per share

10. Book Value Per share- it measures the amount that would be distributed to holders of
each share of common stock if all assets were sold at their balance sheet carrying amounts
and if all creditors were paid off.
Ordinary SHE
BV per share=
No . of ordinary share outstanding , end

11. Working Capital


WC=Current Assets−Current Liabilities

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